Challenging the Corporate Gods

When the founders of the Japanese camera maker Olympus decided in the 1920s to name their company after the home of the Greek gods, they could not have imagined how appropriate that appellation would be nine decades later.

The current accounting scandal at the firm demonstrates the kind of arrogant and unscrupulous behavior frequently attributed to Zeus and other deities.

In October it came to light that the company had paid out suspiciously large sums for some dubious acquisitions. Under pressure from regulators and law enforcement agencies, Olympus management named a panel of outsiders to look into the matter. While they were doing their work, the company admitted that for decades it had been hiding losses from high-risk, off-balance-sheet investments through those bogus deal fees.

The revelation was a serious blow to the reputation of the company, its top executives and its outside auditors—the Japanese branches of global accounting giants KPMG and Ernst & Young—which had signed off on the cooked books. It’s been reported that KPMG auditors raised questions about the merger fees, prompting Olympus to switch its business to Ernst & Young. What’s not clear is whether KPMG ever did anything about its misgivings over the company’s creative accounting.

President Shuichi Takayama bowed deeply in apology while admitting to the deception (photo), but the controversy would not die down. For a while there were reports (subsequently denied by the company) that the Yakuza, Japan’s organized crime networks, might have been involved.

Any hope that this scandal would blow over were removed in early December, when that panel of outsiders—consisting of lawyers, judges, prosecutors and accountants—released a report of its findings. The document (only the summary is online) is devastating. After outlining a complex scheme to hide the investment losses by shifting funds through foreign and domestic accounts, it concludes that there were serious failures of management oversight, corporate governance (board members are described as yes men), transparency, auditing and other aspects of accountability. The management of Olympus was described as “rotten to the core” and the scandal as a “malignant tumor.”

Along with the strong words there appears to be some strong action. Japanese prosecutors have just raided the Tokyo headquarters of Olympus and the home of its former chairman in search of evidence for what are expected to be criminal charges. There is also talk that the company could be delisted from the Tokyo Stock Exchange.

It remains to be seen how steep a price the company and the other guilty parties pay for this long-term fraud, but the treatment of Olympus already stands in stark contrast to the way in which many U.S. officials have been handling cases of domestic corporate misbehavior.

Whereas in Japan there is still the possibility of serious consequences for corporate fraud, in this country the penalties are in effect a slap on the wrist. That’s the only way to describe the way in the large banks, for example, have resolved the few cases that have been brought against them for misconduct that brought on the financial crisis that still afflicts us.

In the latest of these, Bank of America is paying $335 million to settle allegations that it (actually, the Countrywide Financial business it acquired) steered minority borrowers into predatory mortgages. Earlier, Citigroup negotiated a $282 million deal to settle fraud charges with the Securities and Exchange Commission that was so sweet the judge in the case protested.

These buy-your-way-out-of-legal-jeopardy deals also apply to non-financial firms. Alpha Natural Resources, which purchased the notorious Massey Energy, agreed to pay $209 million to resolve charges against Massey stemming from last year’s catastrophic mining disaster in West Virginia. At least when Merck agreed to pay $950 million to resolve charges over the illegal marketing of its painkiller Vioxx it also pleaded guilty to a criminal charge. But that doesn’t mean much of anything in terms of the company’s ability to operate.

A payment of a couple of hundred million does not mean much to a company such as Citigroup, which has assets of nearly $2 trillion. Until companies fear legal consequences that stand in the way of business as usual or put top executives behind bars, they will continue their nefarious ways. After all, like their Japanese counterparts, many of them are “rotten to the core.”

Leave a Reply